Purchases and Sales are common accounting terms, which students are expected to understand, and tested on at the foundation level. Students taking further exams are expected to have a clear understanding what constitutes purchases and sales.
For the purpose of accounting, Purchases are the procurement/buying of items which a business plans on re-selling, or the procurement/buying of items that make up the components of items a business sells. While sales is the ‘sale’ of goods which a business is established for.
Frank Wood & Alan Sangster (Business Accounting 1, 12th Ed) give a simple definition for purchases as ‘ the purchase of those goods which the business buys with the sole intention if selling‘, and sales as ‘ the sale of those goods in which the business normally deals and which were bought with the sole intention of resale‘
In understanding Purchases and Sales, it should be clear that purchases/sales is limited to those items a business deals in.
For example, Freeman Furniture Shop – a business selling & making all kinds of home and office furniture purchases the following on 1st January 2014, and subsequently sold off items 1 – 3 on the list on 14th October 2014:
- 25 Swivel office chairs
- 2 Toyota HiAce buses
- 4 HP Laptop computers
- 25 Planks of Cherry wood – for furniture making
- 5 tins of wood stain
Since purchases are ‘ those goods which the business buys with the sole intention if selling’; items nos 1,4 & 5 are purchases of Freeman Furniture Shop on the 1st January 2014, and only the sale of item 1 is classified as Sales for 14th October 2014. Sales of other items should be recorded separately.
Exam Tip: in the exams, items which should be tagged as purchases may be referred to as ‘goods’ , and other non-sale items are usually given a brief description e.g sale of a Toyota HiAce bus, previously used for delivering furniture.
Do you have any tips for recognising purchases or Sales? Please share
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